December 19, 2013

The Ultimate Obamacare Chill-Out Post

Everybody worries about Obamacare leading to the dreaded insurance “death spiral.” It would work like this: Large numbers of young, predominantly healthy people decide insurance isn’t worth the price. Insurers, left with a pool of predominantly older and sicker people who run up big medical bills, raise coverage significantly next year. Those higher prices scare away even more people in good health. The cycle repeats itself until premiums become exorbitant and only the sickest people are willing to pay them—basically, the scariest environment imaginable, at least in the world of actuarial science.

The fear has a historical basis. Death spirals, or something similar to them, happened in New Jersey and a few other states that tried reforming health insurance during the 1990s. But two new briefings offer good reason to believe Obamacare is a lot less prone to this problem—even if, as some critics have been pointing out, young people don’t sign up in numbers proportionate to their share of the population.

One of the briefings comes from three researchers at the Kaiser Family Foundation: Gary Claxton, Larry Levitt, and Anthony Damico. Based on available data, they note, about 40 percent of the people eligible to get insurance on the new exchanges are between the ages of 18 and 34. Using a simulation model, they projected how premiums would change if younger people signed up at lower rates. If those young people end up as just 25 percent of the market, rather than the 40 percent they represent in the population, then insurers would indeed raise rates. But, according to the Kaiser report, the increase would be relatively modest. As they explain:

Insurers typically set their premiums to achieve a 3-4% profit margin, so a shortfall due to skewed enrollment by age could reduce the profit margin of insurers substantially in 2014. But, even in the worst case, insurers would still be expected to earn profits, and would then likely raise premiums in 2015 to make up the shortfall. However, a one to two percent premium increase would be well below the level that would trigger a “death spiral,” which would occur if insurers needed to increase premiums substantially, in turn further discouraging young and healthy people from enrolling.

And that’s probably a worst-case scenario. In October and November, California, which has a fully functioning exchange, reported that 25 percent of people signing up were in the 18-to-34 age group. But the pattern has been for older, sicker people to sign up first, because they are the ones who are most determined to get coverage. The younger, healthier people sign up later—sometimes, at the very last minute, as they realize they will face financial penalties (i.e., the individual mandate) for carrying no coverage. Most likely, the participation of young people will increase in the next few months.

In addition, as the Kaiser researchers point out, the question right now really isn’t how the participation of young people compares to their proportion of the population. It’s how their participation compares to insurance company expectations. Most likely insurers assumed young people might be a little more reluctant to sign up—and their rates reflect that. They won’t have to raise them (beyond the usual increases) unless their guesses were wrong.

Of course, the insurance companies could have guessed wrong. It wouldn't be the first time. In addition, the Kaiser paper looks only at age, not health status per se. But that’s where the second paper comes in. It’s a study from researchers at the Urban Institute, and published by the Robert Wood Johnson Foundation. Those reseachers—Linda Blumberg and John Holahan—tried to figure out what would happen if enrollment in the exchanges was lower than expected or healthy people stayed away disproportionately. It’s a real worry, given that early technological problems made it hard for people to enroll initially and may have scared off some potential subscribers.

But, as readers of this space know, the law has a set of built-in “shock absorbers”—that is, mechanisms to compensate insurers for unexpected losses because they underestimated the medical costs of their new customers. Wonks know these as the “three Rs,” for reinsurance, risk adjustment, and risk corridors. All non-wonks need to know is that, because of these protections, most insurers can cope with unpredictable enrollment for the first two or even three years. Katherine Hempstead, a team director and senior program officer at Robert Wood Johnson, summarizes the findings this way:

Although the Affordable Care Act experienced some hiccups, enrollment in ‎insurance plans has increased greatly in recent weeks. Fortunately, there are key provisions in this law that will go a long way to stabilize markets in the event that actual enrollment does not meet forecasts at the end of the first open enrollment period.

None of this means that unexpectedly low enrollment from healthy people would be a good thing—or without consequences. Premiums would rise, potentially increasing the cost of federal subsidies and/or premiums for people buying coverage without federal tax credits. But the increases would not be disastrous. And that’s a pretty good lesson to remember. People tend to talk about Obamacare as if it’s going to be a ringing success or a total catastrophe. In reality, it’s likely to be a mix of good and bad news, with lots of variation from state to state, and with lots of unanswered questions that linger for months and even years.